Kleinberg Kaplan Litigation chair Marc Rosen was quoted extensively by the Hedge Fund Law Report concerning the announcement, on December 29, 2017, that Valeant Pharmaceuticals and Pershing Square have agreed to settle litigation against them alleging insider trading under SEC Rule 14e-3, in connection with the Alergan tender offer. Mr. Rosen discusses the genesis of this litigation, the insider trading implications and certain unresolved issues.

In the February 22, 2018 article titled “Ways the Valeant-Pershing Square Settlement Could Affect Future Insider Trading Lawsuits,” Mr. Rosen explains that under Rule 14e-3, any person in possession of material non-public information, other than the bidder, is prohibited from buying shares in the target company once the bidder has initiated a tender offer. According to Mr. Rosen, “this case represents potential insider trading without the deception or the corrupt motivation.” He goes on to state, “while it may not seem fair that sellers of Allergan stock should have a right to know Pershing Square’s trading strategies, under Rule 14e-3 [of the Securities Exchange Act of 1934], the sellers are actually allowed to know the investment fund’s plans. If they are kept in the dark, the sellers can resolve their dispute in the courthouse.”

“Rule 14e-3 poses a risk to the parties when engaging in a tender offer,” Mr. Rosen says. “In the future, if activist shareholders don’t want to be ensnared by this rule – and by this type of insider trading litigation – they may avoid hostile takeovers via tender offer, which can be expensive and risky ways of accomplishing takeovers,” explains Mr. Rosen, who also predicts that activists will likely be wary of joining forces with an acquirer and then buying shares in the target company, given their knowledge that the acquirer may initiate a tender offer.

Mr. Rosen makes clear that the Valeant-Pershing Square settlement leaves several unresolved issues likely to crop up in future cases, including those relating to the jurisdiction, retroactive liability and other matters. He advises that it is important not to exaggerate the significance of the Valeant case since “so far, Congress and the regulators have not deemed it necessary or appropriate to extend the reach of Rule 14e-3 to other acquisition structures, despite critics’ complaints and their desire to balance the perceived imbalance of information in the market… Until then, activists making concerted efforts to avoid taking substantial steps to commence a tender offer can minimize the likelihood they are caught in the web of litigious plaintiffs and Rule 14e-3.”

Finally, Mr. Rosen notes that in the 10 days after the Valeant-Pershing Square acquisition vehicle purchased 5 percent of Allergan’s stock, the vehicle nearly doubled its Allergan position, and that at that point it had to file a Schedule 13D and disclose it had surpassed the 5 percent ownership threshold of a publicly traded company. He further observes that in recent years, some lawmakers have entertained the idea of lowering the 10-day window for hedge fund activists to file the Schedule 13D, but “because regulators have not seen fit to shorten this 10-day disclosure period, activist shareholders continue to have at least some breathing room as they increase their positions during the lead-up to a tender offer or other potential acquisition,” Mr. Rosen concludes.